Answer By law4u team
The Committee of Creditors (CoC) plays a central role in the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC). One of the key functions of the CoC is to make critical decisions during the insolvency proceedings, such as approving or rejecting the resolution plan. The CoC’s decisions are based on voting, and the voting threshold—i.e., the percentage of votes required for a decision to be accepted or rejected—determines the outcome of these proceedings.
Voting Threshold in the CoC
The voting threshold in the Committee of Creditors (CoC) is generally based on the amount of debt a creditor holds rather than the number of creditors. This means that larger creditors (those with higher financial claims) have a greater influence in the decision-making process. The two key voting thresholds that apply to CoC decisions are as follows:
66% Voting Threshold
For many decisions during the CIRP, including the approval of a resolution plan, a majority vote is required. The threshold for this majority is typically 66% of the total voting power of all creditors in the CoC.
This means that the approval or rejection of most major decisions, including the resolution plan, requires the approval of creditors holding at least 66% of the total outstanding debt in the CoC. This applies to both secured and unsecured creditors.
Creditors vote based on the value of their claims, not on the number of creditors. For example, a creditor with a ₹100 crore debt will have more voting power than one with a ₹5 crore debt.
Example:
If a company has a total debt of ₹100 crores in the CoC, creditors holding at least ₹66 crores in debt need to approve a resolution plan for it to pass.
75% Voting Threshold (for Specific Decisions)
In certain cases, such as modifying the resolution plan or approving the liquidation of the company, a higher threshold may be required. A 75% majority of the voting power is needed for such critical decisions.
For example, if the CoC decides to approve a plan to liquidate the company instead of going for a resolution, 75% of the total voting power must agree to this decision.
Example:
If the CoC consists of creditors with a total outstanding claim of ₹100 crores, creditors holding at least ₹75 crores would need to approve the decision to liquidate the company.
How Voting Power Is Determined
In the CoC, voting power is not determined by the number of creditors but by the amount of debt owed to each creditor. The larger the debt, the more voting power the creditor holds. This ensures that decisions are made in the interest of creditors who are more financially invested in the outcome of the insolvency process.
Secured creditors: Creditors with collateral or security interests often hold more voting power because their claims are typically larger and more secured.
Unsecured creditors: These creditors hold claims without any collateral and usually have less voting power, but they still have a say in the decision-making process.
Example of Voting Thresholds in Action
Let’s take an example of a company XYZ Ltd., with a total debt of ₹100 crores owed to various creditors. The CoC is formed and consists of the following creditors:
- ABC Bank (secured creditor): ₹50 crores
- DEF Financial Institution (unsecured creditor): ₹30 crores
- GHI Suppliers (unsecured creditor): ₹10 crores
- JKL Service Providers (unsecured creditor): ₹10 crores
66% Voting Threshold
For the resolution plan to be approved, creditors holding at least ₹66 crores of the total debt must approve the plan. In this case, ABC Bank (₹50 crores) and DEF Financial Institution (₹30 crores) can approve the resolution plan since they together hold ₹80 crores, which is more than the 66% threshold.
75% Voting Threshold
If the CoC decides to liquidate the company, the approval of creditors holding at least ₹75 crores is required. In this case, ABC Bank and DEF Financial Institution together hold ₹80 crores, so they can approve the liquidation decision.
Impact of Voting Threshold on Decisions
The voting threshold has significant implications for how decisions are made during the CIRP. Here are a few key points:
- Majority Rule: Decisions requiring 66% approval generally pass with the consent of larger creditors. Small creditors may have limited influence if larger creditors do not agree with them.
- Protecting Minority Creditors: While the larger creditors have more voting power, the IBC ensures that decisions must reflect the overall interests of all creditors, including smaller unsecured creditors, to some extent. The voting threshold ensures that a resolution plan is not passed or rejected by a mere minority.
- Disagreements Between Creditors: If creditors are unable to agree on a resolution plan, the process can lead to liquidation. However, the voting threshold prevents any one creditor or small group from blocking decisions that benefit the majority of creditors.
Conclusion
The voting threshold in the Committee of Creditors (CoC) is a crucial aspect of the Corporate Insolvency Resolution Process (CIRP). It determines whether major decisions, such as the approval of a resolution plan or the decision to liquidate a company, are approved or rejected. In most cases, a 66% majority of the total debt is required to approve a resolution plan, while some decisions require a 75% majority. This voting structure ensures that decisions are made in the collective interest of creditors, with larger creditors having more influence due to their higher financial stakes.
